Arm's Length Banking and Firm Innovation: Evidence from Korea

27 Pages Posted: 4 May 2020

See all articles by Jeongdae Yim

Jeongdae Yim

Kyungpook National University

Date Written: April 8, 2020

Abstract

This study explores the effect of bank loans subdivided in arm’s length banking and relational banking on innovation of Korean listed firms. I find that bank loans from relational banking negatively affect firm innovation whereas those from arm’s length banking positively affect it. This finding implies that diverse opinions among banks may increase the probability of financing for innovation. This finding also remains robust in Tobit, Poisson, and negative binomial regressions, in using reconstructed sample by a propensity score matching, and in two-stage regressions using an instrumental variable. This finding also occurs both in high technology and non-high technology firms. However, I find no significant relationship between bank loans and innovation of Chaebol firms. This study provides managers or academic researchers with valuable implications for an appropriate bank-firm relationship for promoting firm innovation.

Keywords: Bank loans, Bank-firm relationship, Arm’s length banking, Relational banking, Firm innovation

JEL Classification: G21, O32

Suggested Citation

Yim, Jeongdae, Arm's Length Banking and Firm Innovation: Evidence from Korea (April 8, 2020). Available at SSRN: https://ssrn.com/abstract=3571080 or http://dx.doi.org/10.2139/ssrn.3571080

Jeongdae Yim (Contact Author)

Kyungpook National University ( email )

Korea, Republic of (South Korea)

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